How $5-a-night hostels led to Japan's first $1 billion startup

by Pavel Alpeyev and Takashi Amano


In 2012, Shintaro Yamada was 34 years old, single and frustrated with his job. So he quit a comfortable position in Tokyo and set out to see the world.

He made a point of traveling on the cheap and mixing with the locals. He stayed at $5-a-night hostels without hot water, hitching motorbike rides and hopping on local buses between destinations. Over six months and 23 countries, he hiked the world’s largest salt flat in Bolivia, stayed in a nomad’s home at the edge of the Sahara desert, tracked the turtles of the Galapagos Islands and visited the tree in India where Buddha found nirvana.

The trip left him determined to start a company that would let people in different countries connect with each other. He saw that even the poorest villages had mobile phones and everyone craved technology for reaching the wider world. That led him to found Mercari Inc., a mobile e-commerce site that matches individual buyers and sellers and this month became the first Japanese startup worth at least $1 billion.

“It broadened my mind, made me want to make something that could be useful anywhere in the world,” said Yamada, now 38, wearing a bright pink hoodie at the company’s headquarters in central Tokyo. “I began to think about a platform that would allow people to exchange money or things or services using their smartphones.”

Yamada struggled with ideas for education and language applications before teaming up with two other founders to establish Mercari in 2013. It reached the landmark valuation this month after raising ¥8.4 billion ($74 million) from investors including Mitsui & Co. and Globis Capital Partners. The company is now based in the same Roppongi Hills complex as Google Inc. and Goldman Sachs Group Inc., with hallways that show off its eclectic mix of goods including a boombox, an acoustic guitar and a stylish green bicycle.

Though the valuation is an accomplishment for Mercari, it also highlights the dearth of major private startups in the world’s third-largest economy. There are 155 so-called unicorns in the world, according to CB Insights, with 92 in the U.S., 25 in China and seven in India. Japan has suffered from a lack of venture capital and a risk-averse culture where the best and brightest strive for stable jobs at big companies and then stay for life.

Yamada thinks the problem isn’t quite as dire as it may appear. Many tech companies in Japan go public well before they reach the $1 billion valuation mark because the country has lenient listing requirements for small, high-growth businesses. The TSE Mothers market requires just $10 million in capitalization and has no income prerequisite; companies going public on the tech-heavy Nasdaq must clear $50 million market cap or $750,000 in profit.

Still, he thinks Japan does need more entrepreneurial role models, the likes of Steve Jobs and Mark Zuckerberg. “There are just not that many people trying,” he said. “Maybe if I do it, more people will believe that it’s possible to succeed.”

Yamada is used to taking the path less traveled. He studied mathematics at Waseda University, a prestigious school whose graduates typically head to the country’s top banks and blue—chip companies. Instead, he took an internship developing an auction site for Rakuten Inc., then a little-known e-commerce site. He met founder Hiroshi Mikitani and saw the site take off into what is now a retailing giant worth $14 billion.

Rather than stay with Rakuten though, Yamada struck out on his own after graduation. He founded a games company called Unoh Inc. (Japanese for right brain) in 2001. The company produced several hits and was acquired by Zynga Inc. in 2010.

He helped localize apps for the San Francisco-based company, an early leader in casual games like FarmVille. It lasted about 18 months. Yamada wanted to work on a project with a more global scale. That led to his six-month odyssey and the founding of Mercari with fellow Waseda alumni Tommy Tomishima and Ryo Ishizuka.

Mercari’s edge has been that it’s designed specifically for mobile phones and lets individuals easily browse through items for sale or post their own. People sell everything from clothes and electronics to baseball tickets. While its staying power remains unproven, the app has been downloaded 32 million times and generates ¥10 billion in monthly transactions, Yamada said. Mercari takes a cut of each sale.

“The market for business-to-consumer services is already quite developed, but user-to-user applications still have a lot of room to grow,” said Tomoaki Kawasaki, an analyst at Iwai Cosmo Securities Co. “Mercari is already in the lead in Japan. There are significant benefits for early movers.”

Yamada is now devising a strategy to boost Mercari’s presence in the U.S. — home turf for industry pioneers Inc. and eBay Inc. The service has been available there since September 2014 and been downloaded 7 million times, but users are tough to retain. To gain more ground, Yamada has dropped Mercari’s 10 percent transaction fee in the country and plans to use its venture money to market through social media sites including Facebook.

There are signs of progress. Mercari has climbed in rankings of shopping apps downloaded for Apple devices, breaking into the top 10 last month, according to data from App Annie. Yamada says he has no illusions about the difficulties of the upcoming battle, but winning a bigger footprint in the U.S. is essential to becoming a global company.

“If not us, then somebody else will take the U.S. market and we will eventually have to face them in Japan,” he said. “This is a case of offense being the best defense.”